It’s one thing when an individual’s credit rating declines. However, a recent credit rating warning from Moody’s applies to the entire country, or more accurately, to the U.S. government as a borrower of capital. This is a serious issue that could affect every investor.
A nation’s credit rating affects its ability to service its debt, while also impacting the country’s standing and reputation among other nations. Meanwhile, Moody’s Investors Service is an influential firm — and it’s raising red flags for America’s economic viability.
So, let’s see what Moody’s has to say about the U.S. government’s credit rating.
Moody’s Credit Rating Warning Could Lead to a Future Downgrade
First things first. Moody’s did not actually downgrade America’s credit rating. In fact, Moody’s is still holding the United States’ credit rating at Aaa, which is a high rating.
However, Moody’s did lower its credit rating outlook on the U.S. government from “stable” to “negative.” This is basically a warning that Moody’s might lower its U.S. credit rating at some point in the future.
As you might expect, Moody’s cited high interest rates as a problem for a government that has to service its considerable debt load:
“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues […] Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability.”
In addition, Moody’s cited the looming fiscal cliff and politicians’ inability to come to a spending agreement:
“Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”
This doesn’t mean that Moody’s is hopeless about America’s fiscal future, however. Encouragingly, the firm believes the U.S. will “retain its exceptional economic strength.” And again, the firm hasn’t reduced its U.S. credit rating yet. So, perhaps the situation will improve in the coming months.
What Can Investors Do Now?
Clearly, investors need to monitor for changes in interest rates moving forward, as this will affect the nation’s ability to service its debt burden. Moreover, investors are encouraged to keep tabs on the government’s progress (or lack thereof) in reaching a long-term spending agreement.
There’s no need to engage in panic-selling or to make drastic changes in your stock portfolio right now. As always, staying informed is the best way to protect yourself amid times of uncertainty for the economy and markets.
On the date of publication, David Moadel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
